Bid for Arrow tipped to spur more action

Royal Dutch Shell and PetroChina's A$3.3 billion ($4.7 billion) bid for Arrow Energy may spur more takeovers of Australian producers of coal-bed gas, a growing source of supply for Asian energy importers.

Eastern Star Gas, a coal-seam gas developer in the Australian state of New South Wales, climbed almost 13 per cent to 81c in Sydney on Monday after Arrow reported the bid.

Bow Energy rose 28 per cent. Santos, Australia's third-largest oil and gas producer, is another potential target, said David Wall, an analyst at Hartleys in Perth.

Projects that pump natural gas from Australia's coal seams for export by ship to Asia, the world's fastest-growing region, offer relatively low-cost resources in a politically stable country, analysts said. International oil companies bring the balance-sheet strength to finance the pipelines and liquefied natural gas plants needed for exports.

"There are significant resources remaining to be consolidated in the form of companies like Eastern Star and Bow, and smaller ones," Wall said.

In the northeast state of Queensland alone, producers including BG Group and ConocoPhillips plan to invest A$50 billion developing coal-bed methane. Arrow said last month that it was considering selling shares or taking on debt to finance the A$2.2 billion Fisherman's Landing LNG project.

"Shell's move on Arrow has been at least partly prompted by Arrow's own funding constraints," Alastair Syme, a London-based analyst at Nomura Holdings said.

"This deal is yet another example of oil majors seeking to reposition further down the cost-curve, a position that unconventional gas potentially provides."

Coal-bed methane, gas in shale and tight gas held between rocks are together known as unconventional gas resources. These deposits can break even with oil prices between US$30 ($43) and US$50 a barrel, making them more profitable than alternatives such as deepwater oil and gas or Canadian tar sands, according to Syme.

Brisbane-based Bow Energy is focusing on boosting reserves to supply the domestic gas markets and LNG plants in Queensland rather than consolidation, chief executive officer John De Stefani said. "Our strategy is to remain independent."

Matthew Doman, a spokesman for Santos, said on Monday that the company didn't comment on speculation. Robert Williams, whose Sydney-based firm, Farrington National, represents Eastern Star, said he would refer a request to managing director David Casey.

Exxon Mobil, the world's most profitable oil and gas company, agreed in December to pay US$30 billion for XTO Energy, which became the largest US gas producer exploiting shale and tight gas deposits.

European oil majors Statoil, Total and BP have bought into US shale-gas joint ventures. In Australia, BG and Conoco have already bought coal-bed gas producers.

Shell, which already owns a 30 per cent stake in Arrow's Queensland coal-bed holdings, and PetroChina may have to increase their offer by as much as 18 per cent to A$3.9 billion to win over shareholders, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co, said in a report.

The offer values Arrow's reserves at less than half of what BG paid for Queensland Gas Co in 2008, and a quarter of what Origin Energy received from selling a stake in a venture to ConocoPhillips, RBS Morgans analyst Nik Burns said. Arrow surged 47 per cent as investors bet the bid might be raised.

"Ultimately Arrow would probably like to be bought out, but it's about achieving the best possible price," said Burns, who predicted on February 12 that Shell may bid for Arrow.

Investors would get A$4.45 for each Arrow share in cash, 28 per cent more than the March 5 close, plus stock in a new company made up of Arrow's international division, the Brisbane-based company said yesterday.

The oil companies may bid as much as A$5.30 a share, said Beveridge of Bernstein.

- BLOOMBERG